Notwithstanding the fact that there is significant localised variation in income yield, we have looked at prospective total 10-year investment returns at a local authority level both across the boroughs of London and the 30 largest rental markets outside of London.

London

London’s lower yielding boroughs tend to have higher capital growth prospects and vice versa. This means that forecast total returns are relatively tightly grouped, varying between 7.3% and 9.1% per annum on average over the next 10 years.

Consequently there is no clear pattern in the distribution of returns. For example, Newham, a low value, high-income yield market delivers returns of just over 9.0% marginally higher than Islington, which is a much higher value lower yielding market with superior capital growth prospects.

Across London, total returns compare favourably with the rest of the UK. Decisions as to precisely where to invest will be dependent on investors' preferences for income yield or capital growth, exit plans, level of investment and risk. In the case of private investors, decisions (particularly regarding location) will be shaped by whether they plan ultimately to live in the property or view it purely as an investment.

Beyond London

The markets outside of London that show the highest potential returns are all located in the South East, where capital growth prospects are the strongest.

Areas with weaker capital growth prospects such as Milton Keynes and Medway deliver sufficiently high-income yields to deliver competitive forecasts for competitive returns.

By contrast, despite higher income yields in northern markets reduced capital growth prospects will continue to suppress total returns.

To identify investment opportunities in the northern cities, it will be necessary to look for higher yielding lower value stock or to look beyond a 10-year investment horizon to secure competitive returns.

The investment matrix

The tables in the gallery show average annual total returns for the next 10 years and the extent to which those returns are made up by net income yields. For example, annualised total returns of over 8.0% are expected in Elmbridge with net income yield making up less than half of this return. Net income yields are calculated at 70% of gross income yield. Savills house price forecasts have been adopted to arrive at capital growth.

Taken from
Special Report: Rental Britain